TY - JOUR
T1 - Choice simplification
T2 - A theory of mental budgeting and naive diversification
AU - Koszegi, Botond
AU - Matějka, Filip
N1 - Publisher Copyright:
© 2020 Oxford University Press. All rights reserved.
PY - 2020/5/1
Y1 - 2020/5/1
N2 - We develop a theory of how an agent makes basic multiproduct consumption decisions in the presence of taste, consumption opportunity, and price shocks that are costly to attend to. We establish that the agent often simplifies her choices by restricting attention to a few important considerations, which depend on the decision at hand and affect her consumption patterns in specificways. If the agent's problem is to choose the consumption levels of many goods with different degrees of substitutability, then she may create mental budgets for more substitutable products (e.g., entertainment). In some situations, it is optimal to specify budgets in terms of consumption quantities, but when most products have an abundance of substitutes, specifying budgets in terms of nominal spending tends to be optimal. If the goods are complements, in contrast, then the agent may-consistent with naive diversification-choose a fixed, unconsidered mix of products. And if the agent's problem is to choose one of multiple products to fulfill a given consumption need (e.g., for gasoline or a bed), then it is often optimal for her to allocate a fixed sum for the need. JEL Codes: D01, D11, D14.
AB - We develop a theory of how an agent makes basic multiproduct consumption decisions in the presence of taste, consumption opportunity, and price shocks that are costly to attend to. We establish that the agent often simplifies her choices by restricting attention to a few important considerations, which depend on the decision at hand and affect her consumption patterns in specificways. If the agent's problem is to choose the consumption levels of many goods with different degrees of substitutability, then she may create mental budgets for more substitutable products (e.g., entertainment). In some situations, it is optimal to specify budgets in terms of consumption quantities, but when most products have an abundance of substitutes, specifying budgets in terms of nominal spending tends to be optimal. If the goods are complements, in contrast, then the agent may-consistent with naive diversification-choose a fixed, unconsidered mix of products. And if the agent's problem is to choose one of multiple products to fulfill a given consumption need (e.g., for gasoline or a bed), then it is often optimal for her to allocate a fixed sum for the need. JEL Codes: D01, D11, D14.
UR - http://www.scopus.com/inward/record.url?scp=85085750571&partnerID=8YFLogxK
U2 - 10.1093/qje/qjz043
DO - 10.1093/qje/qjz043
M3 - Review Article
AN - SCOPUS:85085750571
SN - 0033-5533
VL - 135
SP - 1153
EP - 1207
JO - Quarterly Journal of Economics
JF - Quarterly Journal of Economics
IS - 2
ER -